Advantages and Disadvantages Debt Financing

ADVANTAGES AND DISADVANTAGES DEBT FINANCING

TODAY'S OVERVIEW MAJOR TALKING POINTS

Debt Financing Overview Types of Debt Financing Advantages of Debt Financing Disadvantages of Debt Financing

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DEBT FINANCING OVERVIEW Debt is essentially borrowed money. Most of us encounter some form of debt in our day to day lives; mortgages, car financing and loans, and credit cards are some example. It is no different for a business. With debt financing, your business would be borrowing an agreed amount of money from a lender which will be paid back in a predetermined period of time.

Small businesses can use lines of credit, working capital loans or a number of other financing programs. Usually smaller companies, such as restaurants, manufacturing and retail companies, will find debt financing to be more favorable for their needs. In order to get approved by lenders you will typically need a good credit score, business history, financial records and a strong business plan. Evaluate debt vs. equity financing pros and cons before making any decisions.

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TYPES OF DEBT FINANCING Term Loans Banks, credit unions or alternative lenders provide the full amount of capital requested upfront and repayments are made over an agreed amount of time.

Credit cards Funding coming from a bank or financial institution. There is a limit, usually based off your credit score, and the money must be paid back over a period of time with monthly payments.

Merchant Cash Advance Businesses that receive a majority of their income from credit cards allow lenders to take a daily percentage of credit card earnings.

Invoice Financing

Capital is given up front to a business in exchange for guaranteed incoming money, from your invoices and account receivables.

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ADVANTAGES OF DEBT FINANCING One of the biggest advantages to debt financing is you maintain ownership and control over your business.

You keep your company’s profits.

Loan agreements are temporary. Once you have paid off your loan you are free from debt and contracts. As long as the loan is paid back in the agreed upon period time and good credit is maintained, you can take out future loans if necessary.

Business debts are tax deductible.

In the long run interest rates on loans will usually cost you less than giving up a percentage of your company.

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DISADVANTAGES OF DEBT FINANCING The money must be repaid regardless of the success of the business.

Startup companies already have high expenses and can sometimes take a few years before turning over a real profit.

Monthly debt payments can put a lot of stress on a new business.

Too much debt negatively affects the value of your company making future loans difficult.

Some contracts may have increasing interest rates over a period of time.

Your personal belongings such as homes, cars, and personal finances can be taken if used as collateral for the loan, and you fail to make payments.

Lenders may place unfavorable limitations on what the loan can be used for.

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